Friday, February 22, 2008

Is Northern Rock partly Granite?

Ah, the (mostly political) trouble you get into when first you try to nationalise a bank (financial troubles don't just disappear, either).

(Guambat has recently talked about the propensity of some to want to nationalize debts, which doesn't impress this stumpy old creature.)

Apart from ideology and idiots, the practical problem of nationalising, or privatizing for that matter, is the financial complexity of modern banking. The bank is no longer that building downtown with the big vault. It's now a web of visible and invisible on and off relationships, onshore and off, on balance sheet and off, and so on and on.

As we learned from the likes of Enron, some off balance sheet "vehicles" are there to hide away and hive off profits. But not all these vehicles are such delightful SUVs. Some are SIVs that leak like seives.

So since Enron we learn we have to discriminate because some off balance sheet off shore vehicles are beneficial and some are not so (and, of course, that begs the question, beneficial to whom ?-- but not today).

Take Northern Rock, as the Brits have now done. It "has" (or does it?) an offshore off balance sheet vehicle thingy called Granite. It's really quite a curious set-up.

You see, Granite was set up rather uncharitably to be a charitable trust cover for Northern Rock's lending expansion:
The Granite charitable trust was set up by Northern Rock in 1999 to raise cash for Down's Syndrome North East Association.
And, we're told, all the other kids do it too:
Granite is a company set up in 1999 by Northern Rock in the offshore tax haven of Jersey. Its technical name is a special purpose vehicle.

Many other banks have these vehicles, including Halifax, Bank of Scotland and Barclays. It is particularly common in the US, where almost all mortgages are held within special-purpose vehicles such as Granite. Northern Rock has two other offshore companies, called Dollarite, which holds some of the loans that the Rock has sold to businesses, and Whinstone, a much smaller vehicle.
So what's the deal here? Well, the government's plan to nationalize/nationalise Northern Rock does not extend to Granite, and some politicians are trying cynically or otherwise to discover and decide if that is good or bad for their constituent taxpaying voters.

Some say it is a case of nationalising the rubbish bits and asset stripping off the good bits.

Others more schooled in real finance than real politik debate that assertion.

If you feel like killing yourself, you can try to follow the various bouncing balls in this saga here.

The problem, as is so often the case in this sound bite era, is that serious errors can occur from failure to pay tedious attention to the brouhaha, as FT Alphaville's Sam Jones is so adept at illustrating. Sam's summation:
Nationalising Granite -as some are now calling for - would be both pointless, ridiculously complicated and utterly unnecessary, if not impossible to do.... The taxpayer, in other words, doesn’t have much to fear from Granite.
You need to read his whole explanation to put that in context, but it is worth doing, particularly if you've made it this far down the page anyway.


APOLOGIES, NIKKIE, not Ikkie; Guambat's fingers don't always listen to his head.

2 Comments:

Anonymous Anonymous said...

Hi Gumbat,

Hope you get this message as I'm commenting on a 2008 blog. But I'm particularly interested in 'Special purpose Vehicles (oe Companies or Entities) and particularly with regards to HBOS - or previously with Bank of Scotland. Do you happen to know the name of eqivilent companies to Granite but for HBOS?

You will have made a friend for life if you can shed any light on this!

Kind regards

nikki

14 June 2009 at 12:09:00 am GMT+10  
Blogger Guambat Stew said...

ikki, Sorry Guambat cannot be your friend for life as he has no special knowledge of hbos or any other bank; only what he reads on the cyber-papers.

That said, you might gain some insight and leads to further inquiry here:
http://www.google.com/search?hl=en&q=hbos+special+purpose+vehicle&cts=1248392672840&aq=f&oq=&aqi=

24 July 2009 at 9:48:00 am GMT+10  

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